Affordable segment is the catchphrase in the market now, with developers directing their attention on this rather under-penetrated segment. The share of sub Rs 50 lakh-segment is at its highest since 2008 now and consistently rising over the last few years with share during January-September 2016 at 30%.
Over the last few years as the residential market witnessed a slowdown, developers directed focus on the affordable segment, as they anticipated greater traction in this segment. At this point it is important to contemplate if the impetus on the affordable segment by developers will continue, even once the overall market improves, or is it just a passing fad.
My belief is that the market will continue to see momentum in the affordable segment even after the overall realty market’s revival. Firstly, the inherent demand in this segment is too high to ignore. The lower income group and Middle income group housing account for the maximum demand for housing units, led by the sheer size of these income groups.
The highest demand for housing is seen among the MIG in particular, while the steepest gap between demand and supply exists for housing for the LIG. The demand for units under the sub INR 50 lakh-segment will give developers a huge opportunity, and not just in tier I cities. It is expected that demand by the LIG and MIG is likely to account for 76% of total demand for housing units between 2016 and 2020 in tier II and tier III cities. This demand would be led by greater migration into such cities led by increasing employment opportunities, presenting a huge opportunity to developers.
Secondly, the Real Estate Regulatory Authority (RERA) will bring in higher professionalism in the highly fragmented real estate market, with fly-by-night and part-time developers being ousted. This would give rise to standard business practices and reputed developers, who would do well to have a presence across segments.
It is also important to realize that high-end and luxury segments cannot be the staple for developers in the longer run, which is why it is essential balance the portfolio. Investors such as World Bank’s private arm- International Finance Corporation, Brick Eagle Capital are keenly watching the affordable segment, which would give some confidence to developers to foray into this segment. Moreover, the government is incentivizing developers by doling out tax cuts for affordable projects, as announced in the recent budget.
The thrust on affordable housing shows that developers are keen to be involved in this high-demand segment, where margins can be as low as one-fifth of those of high-end and luxury projects. The speed of construction and the costs involved are important parameters as they dictate the ultimate affordability of homes, as well as the financial viability of the project. Standardization of designs would further help developers keep a lid on costs, making such projects financially viable.
As the government looks to introduce single-window clearances across cities and as ease of doing business improves across states, developers would benefit from lower approval time. Currently in 2016, Andhra Pradesh and Telangana lead the rankings, toppling Gujarat. The healthy competition among states is a sign that governments are pro-actively seeking private investments into their respective states. Such reforms would not only enable faster development of projects, but also minimize cost escalation arising from delays.
Developers with a long-term vision would upgrade technological skills and incorporate assembly line techniques that would help their projects to be lucrative. If we are able to create the right kind of environment with government policies backed by a more rational approach from developers towards Affordable Housing, we would be able to achieve the goal of Housing for All 2022. In essence, the development of the affordable segment is likely to garner higher importance in the coming years.
DISCLAIMER: The views expressed are solely of the author and ETRealty.com does not necessarily subscribe to it. ETRealty.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.
About Anshul Jain
Anshul Jain, MD, India, Cushman & Wakefield